Small nonprofit hospitals are already feeling the pressure of compressed revenue and heightened competition, and the finances of those hospitals with lower credit ratings are likely to record poorer financial performance over the next two years, according to a report from Standard & Poor's Ratings Services.
S&P analyzed 80 small nonprofit hospitals within its portfolio. S&P defined a "small hospital" as one with annual net patient revenue of $125 million or less. Revenue was the only criterion.
Analysts found small hospitals experienced more negative credit rating activity than larger standalone hospitals. S&P downgraded 9 percent, or eight, of its small hospitals, compared with 6 percent of all S&P's rated standalone hospitals. None of the hospitals had a credit rating higher than the "A" category.
The median operating margin increased for most small hospitals between 2011 and 2012. An "A"-rated hospital posted a median operating margin of 4 percent, up from 2.8 percent, while "BBB"-rated hospitals had operating margins between 3 percent and 4.2 percent. Even with reimbursement cuts to Medicare and other payers, net patient revenue still increased for three out of four small hospitals in 2012.
However, S&P issued a gloomy outlook because most of the hospitals in this group are located in rural communities and have lower ratings than larger hospitals and health systems. Additionally, small hospitals are likely to see weakened financial profiles if they have to make large capital investments in facility or electronic health record systems, and if they have difficulty in recruiting physicians.
"We believe the impact of healthcare reform is magnified on smaller hospitals compared with their larger peers. Due to their narrower revenue bases, small hospitals have limited options to cope with these pressures," according to S&P's report. "Although these hospitals have focused on appropriate growth strategies and cost-containment efforts, in our view, their smaller service-area economies can only support a certain level of growth, and opportunities to cut costs are increasingly harder to find."
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